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Newsom’s tax proposal flunks Economics 101

 

Have you been enjoying the recent dip in gas prices at the pump? Better fill up now, because Gov. Gavin Newsom’s proposal for a windfall profits tax on the oil companies, intended to reduce prices, actually would increase them.

To make this happen, he has called for a special session of the California Legislature.

He’s calling it a “price-gouging penalty.” That will make it an easier sell to those averse to tax increases. And a “penalty” could get around the constitutional requirement for a two-thirds vote in the Legislature to increase taxes, although such an action inevitably would end up in the courts.

If oil prices go too high, as determined by the Legislature, the penalty would be imposed and be put into a “Price Gouging Penalty Fund,” which somehow would be given to motorists, much like the inflation rebates currently being sent to Californians.

“For me this is about never seeing those spikes again,” the governor announced Monday, addressing the sharp prices rises of last summer that saw gas rise in some areas above $7 a gallon. “You guys are all being screwed and taken advantage of.”

This windfall tax proposal — or “price-gouging penalty” — makes no sense upon even the most minimal of review. Newsom himself is a business owner and has to understand why.

As Jared Walczak from the nonpartisan Tax Foundation explained to the Los Angeles Times, “the U.S. government instituted a windfall profit tax in 1980 under Jimmy Carter that ultimately ‘reduced domestic oil production, increased reliance on foreign oil and drove up costs.’”

It’s not hard to figure out why. When times are good, businesses earn a profit, which they use both to reinvest in the business and to tide them over when times are bad. The oil industry is no different.

As recently as April 2020 oil prices actually dropped below $0 a barrel as the pandemic lockdowns kept drivers at home and oil tankers circled the oceans with nowhere to unload their black gold.

That reduced investment in new production facilities.

Then there’s the Russian invasion of Ukraine, resulting in the United States and other countries boycotting Russian energy exports.

The ensuing shortages drove up prices globally.

On top of that, the vast deficit spending binges of the Trump and Biden administrations have contributed to overall inflation, driving up the price of nearly everything.

A windfall profits tax, whatever it’s called, would discourage investment in refineries that produce California’s unique blends of gasoline, leading to more shortages.

The tax itself would get passed on to consumers. Prices at the pump would go up, not down. It’s basic economics.

We urge Southern California’s legislators to reject this counterproductive effort. If they’re serious about wanting to help consumers from higher prices, they should first do no harm.

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